As was widely expected the rate-setters for the BoE have voted unanimously to keep the base rate on hold at 0.75%. It’s not surprising the bank have decided to remain in wait-and-see mode given the major political uncertainty at present, and don’t expect anything drastic from them until there’s greater clarity on Brexit.
The market reaction has been pretty quiet with the GBP/USD rate remaining near its lowest level of the day at $1.32.
UK retail sales add to recent strong data streak
Given the calamitous state of UK politics with it now being over 1000 days since the Brexit referendum and we’re still none the wiser as to what our exit from the EU will look like – let alone the relationship going forward – it is truly remarkable how solid, the economic data remains.
The latest figures reveal a pleasing strength in consumer confidence, as retail sales numbers topped estimates with the 3.7% increase for the 3 months to February representing the largest year-on-year rise since January 2017.
Economic surprise indices for the UK are about as positive as they’ve been for a couple of years, but for the foreseeable future Brexit remains the only game in town as far as currency traders are concerned and the uncertainty is weighing on sterling.
Dovish Fed weighs on USD but stocks fail to rally
The US central bank confirmed their policy U-turn with the announcement last night that rate-setters see no interest rate hikes this year, and only a token 1 in 2020. The market has been expecting this for a while since Chair Powell’s speech at the start of the year, with no 2019 hikes already priced-in before the latest meeting, but the Fedwent above and beyond what most expected by also announcing a slowing of its balance sheet reduction – also known as Quantitative Tightening (QT) beginning in May.
This dovish move caused an immediate drop in the buck, which depreciated across the board while stock and treasuries rallied.
No Powell Put?
What’s important to note is the reaction function of different markets to this change in tack, with equities already seemingly heavily discounting the move, whereas FX markets have been slower to price it in.
For instance, the large gains seen for US stock markets this year have been arguably driven by this shift in Fed policy more than any other factor, while the US dollar still remains higher than it did at the start of the year (according to a trade-weighted index of the buck.) Why this is crucial to note is what it means going forward, with the scope for a sustained move lower in the US dollar now seemingly far greater than a sustained rally in stocks – if we look purely based on Fed policy.
Indeed after an initial move higher as the news broke, US stocks gave up most of the gains, with both the S&P 500 and Dow Jones Industrial Average ending the day in the red.
A failure to extend the year-to-date rally on what is essentially good news could prove ominous and those who still believe in a “Powell Put” should be aware that the S&P500 has only managed to post a gain on 1 of the 9 days of a Fed rate decision since his tenure began.
By David Cheetham